You're Not Exhausted: U.S. Patent Rights Are Not Exhausted By Foreign Sales

Your client International Marketers, Inc. (IMI) owns U.S. and foreign patents for an improved football. IMI wants to license the patent and make direct sales of identical balls around the world, while making its own sales to the U.S. market. However, IMI knows that the price consumers will pay for its football is much higher in the United States than elsewhere. IMI is concerned that footballs sold by it and its licensees to distributors outside the United States might be purchased by third parties and imported back into the United States at a price below what it hopes to charge distributors in the United States.

IMI wants to know whether it can assert a claim of patent infringement against the third parties despite the fact that the balls were first sold outside the United States either by IMI or under IMI's authority. It is now clear that the answer can be “yes.” Rights under a U.S. patent are not automatically exhausted by the patentee's or its licensee's sales of the patented product to third parties in foreign countries. In other words, a U.S. patent holder's rights are not exhausted unless the authorized sale of the patented item occurs within the United States. This result might be surprising to some because it can be contrary to the first sale doctrine under U.S. trademark laws.

Gray Market Goods

“A gray-market good is a foreign-manufactured good, bearing a valid United States trademark, that is imported without the consent of the United States trademark holder.” K Mart Corp. v. Cartier, Inc., 486 U.S. 281, 285 (1984). Under U.S. trademark law, the resale of genuine goods bearing a trademark does not constitute trademark infringement. Davidoff & CIE, S.A., v. PLD Int'l Corp., 263 F.3d 1297, 1301 (11th Cir. 2001). As the Second Circuit stated:

As a general rule, trademark law does not reach the sale of genuine goods bearing a true mark even though the sale is not authorized by the mark owner. … Thus, a distributor who resells trademarked goods without change is not liable for trademark infringement. Polymer Technology Corp. v. Mimran, 975 F.2d 58, 61-62 (2d Cir. 1992).

This is because, under the first sale or exhaustion doctrine, the trademark protections of the Lanham Act can become exhausted after the trademark owner's first authorized sale of the product bearing the trademark.

The resale of genuine trademarked goods generally does not constitute infringement. … This is for the simple reason that consumers are not confused as to the origin of the goods: the origin has not changed as a result of the resale. … Under what has sometimes been called the “first sale” or “exhaustion” doctrine, the trademark protections of the Lanham Act are exhausted after the trademark owner's first authorized sale of that product. … Therefore, even though a subsequent sale is without a trademark owner's consent, the resale of a genuine good does not violate the Act. Davidoff, 263 F.3d at 1301-2 (emphasis added).

Thus, a reseller of a genuine good bearing a trademark is not necessarily liable for trademark infringement.

Similarly, the sale of gray-market goods in the United States would not constitute trademark infringement unless, eg, the gray-market good differed materially from the authentic goods authorized for sale by the trademark owner in the United States. Societe Des Produits Nestle, S.A. v. Casa Helvetia, Inc., 982 F.2d 633, 638 (1st Cir. 1992). Thus, the first sale doctrine under U.S. trademark law appears to be more concerned with the origin of the goods and their authenticity, rather than geographic boundaries.

Notwithstanding the first sale rule under the trademark laws, the patent rights of a patent holder of a patented product are not automatically exhausted unless the patented product is sold in the United States by the patentee or a licensee authorized to sell the patented product in the United States. Fuji Photo Film Co. v. Jazz Photo Corp., 394 F.3d 1368, 1376 (Fed. Cir. 2005). Thus, absent some express or implied agreement to the contrary, if a patented product is sold abroad by the patentee or its licensee, the patent holder has the right to bring a case of patent infringement against an unauthorized importation and sale of that foreign origin product.

Supreme Court Precedent

Boesch v. Graff is the seminal case on the first sale or exhaustion doctrine with respect to patented goods. 133 U.S. 697 (1890). Boesch involved a lamp burner that was patented in both Germany and the United States. Id. at 699. The alleged infringers purchased lamp burners in Germany from an individual named Hecht, who had the right to make and sell them in Germany. The court below found that the alleged infringer's sale of the lamp burners infringed the U.S. patent. On appeal, the Supreme Court considered the following question:

[W]hether a dealer residing in the United States can purchase in another country articles patented there, from a person authorized to sell them, and import them to and sell them in the United States, without the license or consent of the owners of the United States Patent. Id. at 702.

The Supreme Court found that the individual who was authorized to make and sell the lamp burners in Germany was conferred that right under the laws of Germany, but that “purchasers from him could not be thereby authorized to sell the articles in the United States in defiance of the rights of patentees under a United States patent.” Id. at 703. Thus, the Supreme Court confirmed that U.S. patent rights were not exhausted by an authorized sale of the patented item in a foreign country.

Notwithstanding Boesch, the law on first sale exhaustion has not been perfectly clear to everyone. Hecht was not a licensee or otherwise authorized by the owner of the U.S. patent. Id. at 701. Under German law, a patent could not be asserted against someone who had already started to use the invention in Germany prior to the patentee's application for the patent. Id. Hecht had made sufficient preparations to manufacture the burners prior to the application for the German patent. Id. As a result, Hecht was not a licensee under the patent, but was authorized under the German laws to make and sell the lamp burners. Id. Some have argued that the law was not clear whether the outcome in Boesch would have been the same if Hecht was a licensee under the German or U.S. patents. Thus, some had considered it unresolved whether foreign sales made by the owner of the U.S. patent or a licensee authorized under the U.S. patent would exhaust the patentee's rights in the United States. Moreover, several courts had found an implied license based on the circumstances of foreign sales. This alleged ambiguity was resolved by a trilogy of cases involving Fuji Photo Film Co., Ltd. (“Fuji”) and Jazz Photo Corp. (“Jazz”).

In Jazz Photo Corp. v. Int'l Trade Comm'n, Jazz appealed from the U.S. International Trade Commission's determination that Jazz's refurbishment of single use cameras infringed Fuji's patents. 264 F.3d 1094 (Fed. Cir. 2001). Jazz argued that its refurbishment of used single use cameras was repair rather than impermissible reconstruction. Id. at 1101. The Federal Circuit found that Fuji's patent rights in single use cameras sold abroad by Fuji and its licensees, such as Kodak, were not exhausted and that such cameras were not entitled to the repair defense. Rather, Jazz infringed Fuji's patents regardless of the nature of the refurbishing activities:

Imported [single use cameras] of solely foreign provenance are not immunized from infringement of United States patents by the nature of their refurbishment. Id.

Subsequently, in Fuji Photo Film Co. v. Jazz Photo Corp., the district court found that Jazz was liable for infringing Fuji's patents. 249 F. Supp. 2d 434 (D.N.J. 2003). In reaching its determination, the district court applied the two-part test articulated in Jazz Photo Corp. by the Federal Circuit: 1) whether the refurbishment process used by Jazz constituted repair; and 2) whether the cameras refurbished by Jazz were from the shells of cameras first sold under the patentee's authority in the United States. Id. at 441-442. The district court strictly applied the second part of the test noting that the Federal Circuit explicitly stated in Jazz Photo Corp. that the permissible repair defense was only available for cameras that were first sold in the United States with the patentee's authorization.

The Federal Circuit explicitly stated this holding four times in the [Jazz Photo Corp.] opinion. See id. at 1098 (reaching repair issue only with respect to used cameras whose first sale was 'in the United States' with the patentee's authorization); id. at 1005 (exhaustion applies 'when a patented device has been lawfully sold in the United States'); id. at 1110 (same, and affirming the ITC's finding of infringement for 'LFFPs whose prior sale was not in the United States'). Thus, the Federal Circuit has ruled that Fuji's patent rights are exhausted only with respect to cameras refurbished from shells first sold in the United States. This court is bound by the ruling. Id. at 450 (emphasis added).

Jazz appealed, inter alia, the district court's application of the first sale doctrine to the Federal Circuit. Jazz argued that the district court misconstrued the Federal Circuit's earlier holding regarding exhaustion. Fuji Photo Film, 394 F.3d at 1368. Jazz argued that there was exhaustion of U.S. patent rights when the owner of the U.S. patent (or its licensee) made the foreign sale. The Federal Circuit rejected Jazz's argument that foreign sales by Fuji or its licensees exhausted Fuji's U.S. patent rights. Id. at 1376. The Federal Circuit noted that it does not narrowly construe the holdings of Jazz Photo Corp. and Boesch. Without more, authorized foreign sales do not exhaust U.S. patent rights.

Specifically, this court does not read Boesch or [Jazz Photo Corp.] to limit the exhaustion principle to unauthorized sales. Jazz therefore does not escape application of the exhaustion principle because Fuji or its licensees authorized the international first sales of these LFFPs. The patentee's authorization of an international first sale does not affect exhaustion of that patentee's rights in the United States. Moreover the 'solely foreign provenance' language does not negate the exhaustion doctrine when either the patentee or its licensee sells the patented article abroad. Id.

Thus, the Federal Circuit has laid this issue to rest. Foreign sales by a patentee, licensee, or other authorized individual do not exhaust the patentee's rights in the United States, and IMI need not worry about its footballs.

Your client International Marketers, Inc. (IMI) owns U.S. and foreign patents for an improved football. IMI wants to license the patent and make direct sales of identical balls around the world, while making its own sales to the U.S. market. However, IMI knows that the price consumers will pay for its football is much higher in the United States than elsewhere. IMI is concerned that footballs sold by it and its licensees to distributors outside the United States might be purchased by third parties and imported back into the United States at a price below what it hopes to charge distributors in the United States.

IMI wants to know whether it can assert a claim of patent infringement against the third parties despite the fact that the balls were first sold outside the United States either by IMI or under IMI's authority. It is now clear that the answer can be “yes.” Rights under a U.S. patent are not automatically exhausted by the patentee's or its licensee's sales of the patented product to third parties in foreign countries. In other words, a U.S. patent holder's rights are not exhausted unless the authorized sale of the patented item occurs within the United States. This result might be surprising to some because it can be contrary to the first sale doctrine under U.S. trademark laws.

Gray Market Goods

“A gray-market good is a foreign-manufactured good, bearing a valid United States trademark, that is imported without the consent of the United States trademark holder.” K Mart Corp. v. Cartier, Inc., 486 U.S. 281, 285 (1984). Under U.S. trademark law, the resale of genuine goods bearing a trademark does not constitute trademark infringement. Davidoff & CIE, S.A., v. PLD Int'l Corp., 263 F.3d 1297, 1301 (11th Cir. 2001). As the Second Circuit stated:

As a general rule, trademark law does not reach the sale of genuine goods bearing a true mark even though the sale is not authorized by the mark owner. … Thus, a distributor who resells trademarked goods without change is not liable for trademark infringement. Polymer Technology Corp. v. Mimran , 975 F.2d 58, 61-62 (2d Cir. 1992).

This is because, under the first sale or exhaustion doctrine, the trademark protections of the Lanham Act can become exhausted after the trademark owner's first authorized sale of the product bearing the trademark.

The resale of genuine trademarked goods generally does not constitute infringement. … This is for the simple reason that consumers are not confused as to the origin of the goods: the origin has not changed as a result of the resale. … Under what has sometimes been called the “first sale” or “exhaustion” doctrine, the trademark protections of the Lanham Act are exhausted after the trademark owner's first authorized sale of that product. … Therefore, even though a subsequent sale is without a trademark owner's consent, the resale of a genuine good does not violate the Act. Davidoff, 263 F.3d at 1301-2 (emphasis added).

Thus, a reseller of a genuine good bearing a trademark is not necessarily liable for trademark infringement.

Similarly, the sale of gray-market goods in the United States would not constitute trademark infringement unless, eg, the gray-market good differed materially from the authentic goods authorized for sale by the trademark owner in the United States. Societe Des Produits Nestle, S.A. v. Casa Helvetia, Inc., 982 F.2d 633, 638 (1st Cir. 1992). Thus, the first sale doctrine under U.S. trademark law appears to be more concerned with the origin of the goods and their authenticity, rather than geographic boundaries.

Notwithstanding the first sale rule under the trademark laws, the patent rights of a patent holder of a patented product are not automatically exhausted unless the patented product is sold in the United States by the patentee or a licensee authorized to sell the patented product in the United States. Fuji Photo Film Co. v. Jazz Photo Corp., 394 F.3d 1368, 1376 (Fed. Cir. 2005). Thus, absent some express or implied agreement to the contrary, if a patented product is sold abroad by the patentee or its licensee, the patent holder has the right to bring a case of patent infringement against an unauthorized importation and sale of that foreign origin product.

Supreme Court Precedent

Boesch v. Graff is the seminal case on the first sale or exhaustion doctrine with respect to patented goods. 133 U.S. 697 (1890). Boesch involved a lamp burner that was patented in both Germany and the United States. Id. at 699. The alleged infringers purchased lamp burners in Germany from an individual named Hecht, who had the right to make and sell them in Germany. The court below found that the alleged infringer's sale of the lamp burners infringed the U.S. patent. On appeal, the Supreme Court considered the following question:

[W]hether a dealer residing in the United States can purchase in another country articles patented there, from a person authorized to sell them, and import them to and sell them in the United States, without the license or consent of the owners of the United States Patent. Id. at 702.

The Supreme Court found that the individual who was authorized to make and sell the lamp burners in Germany was conferred that right under the laws of Germany, but that “purchasers from him could not be thereby authorized to sell the articles in the United States in defiance of the rights of patentees under a United States patent.” Id. at 703. Thus, the Supreme Court confirmed that U.S. patent rights were not exhausted by an authorized sale of the patented item in a foreign country.

Notwithstanding Boesch, the law on first sale exhaustion has not been perfectly clear to everyone. Hecht was not a licensee or otherwise authorized by the owner of the U.S. patent. Id. at 701. Under German law, a patent could not be asserted against someone who had already started to use the invention in Germany prior to the patentee's application for the patent. Id. Hecht had made sufficient preparations to manufacture the burners prior to the application for the German patent. Id. As a result, Hecht was not a licensee under the patent, but was authorized under the German laws to make and sell the lamp burners. Id. Some have argued that the law was not clear whether the outcome in Boesch would have been the same if Hecht was a licensee under the German or U.S. patents. Thus, some had considered it unresolved whether foreign sales made by the owner of the U.S. patent or a licensee authorized under the U.S. patent would exhaust the patentee's rights in the United States. Moreover, several courts had found an implied license based on the circumstances of foreign sales. This alleged ambiguity was resolved by a trilogy of cases involving Fuji Photo Film Co., Ltd. (“Fuji”) and Jazz Photo Corp. (“Jazz”).

In Jazz Photo Corp. v. Int'l Trade Comm'n, Jazz appealed from the U.S. International Trade Commission's determination that Jazz's refurbishment of single use cameras infringed Fuji's patents. 264 F.3d 1094 (Fed. Cir. 2001). Jazz argued that its refurbishment of used single use cameras was repair rather than impermissible reconstruction. Id. at 1101. The Federal Circuit found that Fuji's patent rights in single use cameras sold abroad by Fuji and its licensees, such as Kodak, were not exhausted and that such cameras were not entitled to the repair defense. Rather, Jazz infringed Fuji's patents regardless of the nature of the refurbishing activities:

Imported [single use cameras] of solely foreign provenance are not immunized from infringement of United States patents by the nature of their refurbishment. Id.

Subsequently, in Fuji Photo Film Co. v. Jazz Photo Corp., the district court found that Jazz was liable for infringing Fuji's patents. 249 F. Supp. 2d 434 (D.N.J. 2003). In reaching its determination, the district court applied the two-part test articulated in Jazz Photo Corp. by the Federal Circuit: 1) whether the refurbishment process used by Jazz constituted repair; and 2) whether the cameras refurbished by Jazz were from the shells of cameras first sold under the patentee's authority in the United States. Id. at 441-442. The district court strictly applied the second part of the test noting that the Federal Circuit explicitly stated in Jazz Photo Corp. that the permissible repair defense was only available for cameras that were first sold in the United States with the patentee's authorization.

The Federal Circuit explicitly stated this holding four times in the [Jazz Photo Corp.] opinion. See id. at 1098 (reaching repair issue only with respect to used cameras whose first sale was 'in the United States' with the patentee's authorization); id. at 1005 (exhaustion applies 'when a patented device has been lawfully sold in the United States'); id. at 1110 (same, and affirming the ITC's finding of infringement for 'LFFPs whose prior sale was not in the United States'). Thus, the Federal Circuit has ruled that Fuji's patent rights are exhausted only with respect to cameras refurbished from shells first sold in the United States. This court is bound by the ruling. Id. at 450 (emphasis added).

Jazz appealed, inter alia, the district court's application of the first sale doctrine to the Federal Circuit. Jazz argued that the district court misconstrued the Federal Circuit's earlier holding regarding exhaustion. Fuji Photo Film, 394 F.3d at 1368. Jazz argued that there was exhaustion of U.S. patent rights when the owner of the U.S. patent (or its licensee) made the foreign sale. The Federal Circuit rejected Jazz's argument that foreign sales by Fuji or its licensees exhausted Fuji's U.S. patent rights. Id. at 1376. The Federal Circuit noted that it does not narrowly construe the holdings of Jazz Photo Corp. and Boesch. Without more, authorized foreign sales do not exhaust U.S. patent rights.

Specifically, this court does not read Boesch or [Jazz Photo Corp.] to limit the exhaustion principle to unauthorized sales. Jazz therefore does not escape application of the exhaustion principle because Fuji or its licensees authorized the international first sales of these LFFPs. The patentee's authorization of an international first sale does not affect exhaustion of that patentee's rights in the United States. Moreover the 'solely foreign provenance' language does not negate the exhaustion doctrine when either the patentee or its licensee sells the patented article abroad. Id.

Thus, the Federal Circuit has laid this issue to rest. Foreign sales by a patentee, licensee, or other authorized individual do not exhaust the patentee's rights in the United States, and IMI need not worry about its footballs.